Reading time: about 5 minutes. In a hurry? The seven key points are listed right below.
The Construction Industry Scheme has had two big shake ups in quick succession. The first arrived in April 2024, when HMRC tightened the rules around Gross Payment Status. The second came on 6 April 2026, just a few weeks ago, with the return of nil returns and the formal exit of local authorities from the scheme.
If you run a construction business in the UK, whether as a contractor, a subcontractor or both, these changes affect how you file, how much you keep and how quickly HMRC can take action against you. Below are seven things every small construction business needs to know about CIS in 2026, with worked examples for both sides and links to the source HMRC guidance.
In a nutshell
- Nil returns are back from 6 April 2026. Contractors must file every tax month or notify HMRC in advance, even when no subcontractors were paid.
- Local authorities and public bodies are out of CIS scope. Do not verify them, do not deduct, do not put them on your monthly return.
- VAT compliance now affects Gross Payment Status. A late VAT return can cost you GPS, just like an unpaid PAYE bill can.
- HMRC can cancel GPS instantly for suspected fraud. No 90 day notice across VAT, Corporation Tax, Income Tax and PAYE.
- Verification still trips contractors up. New subcontractors or those not used in the last 2 tax years must be verified, or pay them at 30%.
- CIS deduction is on labour only. Materials and VAT are excluded from the deduction calculation.
- Late filing penalties stack fast. £100 day one, £200 at two months, then £300 or 5% of deductions at six and twelve months.
1. Nil returns are back from 6 April 2026
From the 2026/27 tax year, every CIS registered contractor must file a monthly return, even when no subcontractors were paid that month.
The only way to skip filing is to tell HMRC in advance that no payments will be made that month, using the CIS online service.
The obligation was scrapped in 2015 to reduce admin, but HMRC found the change actually caused more problems than it solved, with contractors picking up erroneous late filing penalties when they thought there was nothing to do. The reinstated rule, introduced through the 2026 amendment regulations, is intended to make the position clearer. The downside is one more deadline a month, on the 19th.
2. Payments to local authorities and public bodies are out of scope
Payments to councils, NHS trusts and government departments now sit completely outside CIS, with no verification, no deduction and no entry on your monthly return.
The change, also from 6 April 2026, adds a new Regulation 24ZA, replacing the long standing Extra Statutory Concession that had treated these bodies as if they held Gross Payment Status.
The full list of bodies sits in HMRC's Construction Industry Manual. If you regularly work with councils, NHS trusts or government departments, audit your records this quarter to make sure your process is up to date.
3. Gross Payment Status now hinges on your VAT record too
Since 6 April 2024, late VAT returns and missed VAT payments can cost you Gross Payment Status, in the same way unpaid PAYE always could.
VAT now sits alongside Self Assessment, Corporation Tax and PAYE in the statutory compliance test for granting and keeping GPS.
The good news is that minor VAT failures are not counted, and reasonable excuse and appeal rights still apply. The risk is biggest for subcontractors who treat VAT as a back office afterthought. If you hold GPS, treat your VAT returns with the same urgency as your tax returns. HMRC gives 90 days' notice before downgrading you, but by then it is often too late to fix the underlying issue.
4. HMRC can cancel GPS immediately if it suspects fraud
For suspected fraud, HMRC can pull Gross Payment Status on the spot, without the usual 90 day notice, across VAT, Corporation Tax, Income Tax and PAYE.
The 2024 reform extended the grounds on which HMRC can immediately cancel GPS. Where HMRC has reason to suspect that a GPS holder has fraudulently provided incorrect returns or information across these taxes, GPS can be withdrawn straight away.
For most small construction businesses this is not a daily threat, because the rule is aimed at supply chain fraud. The point worth taking from it is that HMRC now connects the dots across taxes. A weak record in one area can pull at the others, and once GPS is gone, the 20% drag on your invoices returns until you can reapply.
5. Verification rules have not changed, but they still trip contractors up
If a subcontractor is new to you, or not used in the current or previous two tax years, you must verify them with HMRC before paying.
HMRC will then tell you whether to pay gross, deduct at the standard 20% or deduct at the higher 30% rate.
Use the free CIS online service to verify in seconds, and keep the verification reference number on file. The most common contractor mistake we see is paying a new subcontractor at 20% by default, when HMRC's records would have given a 30% instruction. The contractor remains liable for the under deducted tax, so a quick verification protects your cash, not the subcontractor's.
6. Materials, VAT and the deduction calculation
The CIS deduction applies only to the labour element of an invoice. Materials and VAT are excluded, so getting that split wrong is where small businesses lose money.
Worked example: subcontractor doing a £600 supply and fix job, VAT registered, materials £200 excluding VAT.
- Total payment (excluding VAT): £600
- Less direct cost of materials (excluding VAT): £200
- Amount liable to deduction: £400
- Deduction at 20% (registered): £80
- Net paid to the subcontractor for the work: £520 (plus VAT charged separately)
Worked example: contractor paying three subcontractors in one tax month.
- Subcontractor A: holds Gross Payment Status, £1,500 paid in full, no deduction
- Subcontractor B: registered, £800 labour plus £200 materials, deduct 20% from £800 which equals £160
- Subcontractor C: not registered, £500 labour only, deduct 30% which equals £150
- Total deducted and owed to HMRC: £310
Both calculations follow the worked examples in HMRC's CIS 340 guide. If your accounting software has a CIS module, the calculation is usually automated, but always sense check the first few runs and confirm that materials and VAT are mapped to the right boxes.
7. Records, deduction statements and the penalty ladder
Late filing penalties start at £100 the day after the filing date and climb fast, so the 19th of every month is the date to protect.
Three deadlines that small contractors regularly miss:
- Monthly return: must reach HMRC by the 19th of the month, covering the tax month that ended on the 5th
- Deduction statement: must be given to each subcontractor within 14 days of the end of the tax month, so by the 19th
- Record keeping: all CIS records must be kept for at least 3 years after the end of the tax year they relate to
The late filing penalties stack quickly. A £100 fixed penalty the day after the filing date. A further £200 at two months. £300 or 5% of the deductions, whichever is greater, at six months and again at twelve months. With the nil return obligation back from April 2026, this ladder now applies in months when you did not pay anyone but forgot to tell HMRC.
What to do this month
If you are a contractor, set up a monthly calendar reminder for the 19th and decide whether you will default to filing nil returns or notifying HMRC of inactive months in advance. If you are a subcontractor with Gross Payment Status, check that your VAT and Corporation Tax records are clean before HMRC's next annual review. If you are both, do both.
Bottom line: CIS in 2026 is not radically different, but the new nil return rule and the VAT linked GPS test mean that a small admin slip can now cost you cash quickly. A calendar reminder for the 19th, clean VAT records and a verification check on every new subcontractor will do most of the work.
How Ollen Services Can Help
Every construction business sits in its own combination of contractor, subcontractor and Gross Payment Status. The right approach for a £200,000 turnover bricklaying limited company is not the same as the right approach for a sole trader plumber working through agencies, and the cost of getting it wrong falls in different places.
At Ollen Services we work with construction contractors and subcontractors across the UK, handling CIS registrations, monthly returns, deduction statements and the Self Assessment or Corporation Tax claims that recover the deducted tax. We will also help you protect your Gross Payment Status, because once it is gone, the 20% drag on cash flow hurts a small business fast.
If you would like a clear picture of where you stand under the 2026 CIS rules, book a free 30 minute consultation. Call us on 07513 491 259 or email hello@ollenservices.co.uk. We provide full support in English and Polish.